U.S. Tax Policy Can Turn on a Dime. Has Alexandria Ocasio-Cortez Just Turned It?

The youngest lawmaker in Congress delivers a history lesson America has needed for years.

Blogging Our Great Divide

January 10, 2019

Who gets taxed in the United States — and by how much — can change both drastically and fast. Back in early 1916, for instance, America’s richest faced income tax rates that posed, at worst, no more than a minor inconvenience. On income over $500,000, about $11.5 million in today’s dollars, deep pockets faced a mere 7 percent federal income tax levy.

In September 1916, with a costly war already raging in Europe, lawmakers in Congress moved to upend that tax calculus. They more than doubled the top tax rate, to 15 percent on income over $2 million.

Congressional leaders would be pleased with their handiwork. The top federal tax rate on the incomes of the rich, future House speaker Henry Rainey from Illinois proudly announced, had reached “the very highest notch.”

Not quite. By the end of 1918, income over $1 million faced a 77 percent federal tax, more than five times the “very highest” tax rate that Henry Rainey could imagine in 1916.

In the century since then, the top tax rate on America’s rich has at times bounced even higher than that 77 percent — and quite a bit lower as well. We’re now living in a low phase. No dollar of a billionaire’s income today ever faces a federal income tax rate over 37 percent.

But could we soon be in for another big bounce up? America’s biggest fans of grand private fortune certainly think so — and that prospect has them terrified. What’s spooking the go-gentle-on-the-rich crowd? A January 6 appearance on America’s iconic TV news show, 60 Minutes, by the most charismatic new lawmaker on Capitol Hill, Alexandria Ocasio-Cortez.

This freshman lawmaker from New York’s outer boroughs had the temerity to suggest that the U.S. tax code ought to subject annual income over $10 million to the 70 percent tax rate once considered just plain mainstream common sense.

Grover Norquist, the nation’s top guardian of right-wing orthodoxy on taxes, blasted Ocasio-Cortez for delivering “the opening shot in a renewed war against taxpayers” and even compared her advocacy for a 70 percent top rate to “slavery.” The GOP whip in Congress, Steve Scalise, claimed Ocasio-Cortez wants to yank away 70 percent of the income Americans make “and give it to leftist fantasy programs.”

Slightly more sober conservatives quickly started trotting out all the hoary rationales for keeping tax rates on the wealthy low. Their all-time favorite argument: “Confiscatory” tax rates on the incomes of the rich may make the non-rich among us feel good, but they simply don’t work.

The wealthy and “their armies of lawyers and lobbyists,” as Heritage Foundation senior fellow and Donald Trump advisor Stephen Moore contended after the Ocasio-Cortez 60 Minutes interview, always end up avoiding whatever stiff rates “dimwitted” members of Congress might insert into the tax code.

Moore’s slam-dunk “proof”? America’s richest 1 percent paid 19 percent of the nation’s federal income tax revenue when the top tax rate stood at 70 percent, he declared, and nowadays, with the top rate down by almost half that, pay 37 percent of federal income tax revenue.

What Moore doesn’t point out: The nation’s top 1 percent pays more of the federal income tax burden today only because the top 1 percent is now raking in a spectacularly higher share of the nation’s personal income, as the work of economists Emmanuel Saez and Thomas Piketty carefully details.

Back in 1976 — the middle of a decade where the top tax rate never dipped below 70 percent — America’s top 1 percent collected just 9 percent of the nation’s income. America’s bottom 90 percent, meanwhile, that year pulled down 67 percent, two-thirds of the nation’s income total.

By 2017, after years of tax cuts on high incomes, the income share of America’s bottom 90 percent had dropped from that two-thirds of the national total to just under half. The income share of the top 1 percent, by contrast, had soared to 21.5 percent.

Too many percentages for you? Let’s talk dollars and cents. In 1976, America’s top 1 percent averaged $425,294, after adjusting for inflation. By 2017, that top 1 percenter average had skyrocketed to $1,380,724.

And how did ordinary-income Americans fare over that same time span? America’s bottom 90 percent averaged $35,510 in 1976, in today’s dollars, and just $35,628 in 2017.

In other words, over the course of the last four decades, most Americans have seen no real increase in their incomes at the same time Americans in the top 1 percent have watched their real incomes more than triple.

Low tax rates on the rich, our history shows, help only the rich. Average Americans made out far better economically in the four decades that began during World War II — years that saw top tax rates on the rich range from 70 to 94 percent — than they have in the four decades since.

Indeed, Americans in the bottom 90 percent watched their real incomes more than double in the high-taxes-on-the-rich middle of the 20th century, from $16,563 in 1942 to $36,545 in 1979.

Alexandria Ocasio-Cortez knows this history. Sometime soon, our right wing fears, so will a majority of her fellow Americans.